A.: A title insurance policy is a contract to indemnify, or protect, an insured (owner or lender) from certain losses or damages suffered as a result of unknown liens, mortgage or any other defects in the title to real estate. For example, let's say that neither you nor the title insurance company knows that your property's mortgage release was forged by a prior owner. Obviously, because no one knows about this forgery, your title insurance policy will not show such a title defect. Even so, your title insurance policy will protect you from a loss if and when the forgery is discovered.

Q.: What is the difference between an Owner's Policy and a Loan Policy of Title Insurance?

A.: An Owner's Policy insures that you have "good and marketable" title to your real estate, which means that there are no other claims on the property and it can be freely sold. A Loan Policy insures the lender that its mortgage is a "valid lien" against your real estate, which means that the lender may, if necessary, legally take your property away from you (as the property's rightful owner) if you fail to pay your mortgage. These two policies will also disclose known matters that may impact your real estate title, such as easements, building set-back lines or use restrictions.

Q.: If the title to my real estate is examined by an attorney, why does anyone need title insurance?

A.: Although the public records are examined for deeds, mortgages, liens and similar matters, sometimes there are title defects, which cannot be discovered merely by looking at recorded documents. For example, an attorney would not know by looking at a recorded deed that it had been signed by a minor.

Q.: Are there other examples of title defects that an attorney would not be able to discover?

A.: There are dozens of "hidden defects" that may exist in any title, including the following, to mention a few: a forged deed or mortgage release; a deed signed by a minor or incompetent; an error made by a public official; a spouse's dower (marriage) rights in real estate owned solely in the name of the other spouse; an improperly-conducted probate proceeding; defective notarizations; inheritance tax liens; rights of military personnel to directly receive notice of any foreclosure against them rather than to be notified by publication (via a newspaper, etc.); and criminal proceedings regarding drugs being sold from the real estate property (e.g., a "crack house") and the property being forfeited to the government.

Q.: My lender required me to purchase buy a Loan Policy when I took out a mortgage. Does this policy protect me against those hidden title defects?

A.: No. However, the Loan Policy will reimburse your lender for any money it does not receive from the foreclosure of your property because of a defect in the title. It is your responsibility to clear up any defects to protect your equity in your real estate. If a defect is discovered, however, your Owner's Policy protects you from consequences that may result.

Q.: How does one discover a "hidden defect"?

A.: Because these defects are hidden, you cannot find them. However, they will find you. You may, for example, be served with a foreclosure lawsuit because your seller forged a mortgage release and what appeared to be a cancelled mortgage was not. Or, you may believe you bought property from an unmarried person, but when the "hidden" spouse claims a dower interest, you may owe this spouse a sum of money equal to one-third of the property's value. Or, the IRS may file a lien because the property you bought from an estate was not shown on the estate tax return and the tax liability became attached to this real estate when the prior owner died. Or, a judgment creditor of your seller whose lien was not correctly indexed by a clerk of courts could file an action to foreclose on your property. These are examples of hidden defects that you will not be able to find until it is too late.

Q.: When should I buy an Owner's Policy?

A.: The best time to buy an Owner's Policy is when the real estate is first transferred to you so that you are immediately protected from title defects. You may purchase an Owner's Policy at any time, though; it will be effective as of the date of your deed no matter when you purchase it. However, it is too late to purchase an Owner's Policy if you've already discovered a defect because the policy will not insure against defects you know about, even if these defects existed before you bought the property. Also, an Owner's Policy will not protect you from your own acts. For example, if you fail to pay a building contractor who has completed work on your property, and the contractor files a lien against your property to collect the money you owe, you cannot use your Owner's Policy to cover your own debt.

Q.: If I purchase an Owner's Policy and a "hidden defect" is found, what will the title insurance company do for me?

A.: Depending upon the type of defect it is, the title company may pay you any money that the defect may have cost you-or the company may cure the defect by preparing new and proper deeds or documents, or file or defend a lawsuit. In short, the title company will do everything possible to cure the defect, including paying you all of your equity up to the policy amount if there is a "total loss of title" (as would result if your deed had been forged).